The first thing that stands out in the financial rescue scheme just introduced by Treasury Secretary Timothy Geithner is the curious choice of terminology. The plan is labeled a Public Private Partnership Investment Program (sometimes “partnership” is left out). Was any thought given to the fact that public private partnership (PPP or P3) is a common euphemism for the privatization or outsourcing of public services by state and local government? Does Geithner really want people to associate his plan with contracting boondoggles?
Then there’s his use of “legacy” to refer to what most people have come to call toxic assets. Yet “legacy” is also the term the auto industry uses when speaking of retiree health benefits and other structural labor costs. Geithner’s references to “legacy assets” and “legacy securities” are thus both a clumsy effort to sanitize common parlance and a potential insult to unionized workers.
Finally, the plan depends heavily on “non-recourse loans.” That same phrase is associated with agricultural subsidy programs—a form of spending that the Obama Administration is seeking to curtail.
The flaws in Geithner’s plan do not end with the branding gaffes. There’s also the awkward fact that the content is essentially the same as the original Troubled Asset Relief Program, with extraordinarily generous sweeteners added for private investors. In other words, Geithner is proposing an even bigger giveaway to private interests than was envisioned by Henry Paulson.
Paulson, of course, abandoned the idea of toxic asset auctions in favor of massive infusions of federal funds into banks large and small. He apparently did so in part because of concerns that it would be difficult for anyone to attach a value to those repugnant securities. There was also a built-in contradiction between the desire of vulture investors to buy at the lowest possible price and the need of banks to get paid something approaching the nominal value of the assets, so that their balance sheets did not collapse. Not to mention the conflict of interest stemming from the fact that the money managers Treasury wanted to handle the sale of the assets had their own holdings in the mortgage-backed securities market.
None of that has changed six months later. The only difference is that Geithner is willing to commit up to $100 billion of taxpayer money to allow investors to purchase the “legacy” assets in a way that puts very little of their own money at risk. The feds would both contribute directly to the purchase price and lend additional money to investors so they can buy more. These are the non-recourse loans, meaning that the purchaser does not have to repay them in full if the security plunges in value.
I get the impression this is the posture Geithner finds most appealing—giving cushy deals to major financial players. As his lame handling of the AIG bonus controversy and his unwillingness to terminate zombie banks such as Citigroup show, he is not inclined to really crack down on Big Money. So why is he handling one of the most important portfolios of an administration committed to change?